Ask Me Help Desk - Tax underpayment penalty

My withholding for the year may have been just lower than the amount required to avoid a tax penalty. I can't be sure as I haven't got any 1099s for 2012, so its possible I may actually have paid 90%. I know I haven't paid enough to reach the other safe harbor, i.e. 110% (in my case) of 2011 tax.

Assume for simplicity that the tax due is 100K, and I have paid just 88K in withholding, not sufficient to reach the 90% safe harbor (even with the extra 1K allowed). So, if I send in an extra payment of say 2K in by Jan 15th, and pay the remainder by April 15th, does this mean that I will be charged interest on 10K for the period up to April 15th ? I know I may be charged some minimal interest for not paying enough on a quarterly basis, but I am trying to figure out if interest from Jan 15th to April 15th 2013 is charged on the tax due - tax withheld, or on the difference between 90% of tax due and tax withheld. That makes a difference in terms of whether I should send in 2K by Jan 15th, or 12 K by Jan 15th.

I did look at form 2210, but I can't understand it.

Thanks !

Send in as much as you can afford, up to the $12K you think you will owe.

This will lower any under-payment penalties you may incur. No interest is charged on the remaining payment sent with the tax return that is filed by 15 April 2013.

ATE, thanks for responding.

However, I'm still confused on my main question. I think I didn't phrase it properly.

I could scramble to send in 12K by Jan 15th, but the impression I get from Form 2210 is that if I were to send in enough to get me up to 90% of tax due (i.e 2K) by Jan 15th, I would not be charged interest for the period Jan15 - Apr15 2013 on the10K balance due (as long as I pay the rest by April 15th). So there is no benefit to sending in the full payment (or possibly overpaying) by Jan 15th, if I can get away with a smaller amount that would get me up 90%.

I know that beyond April 15th, I would have to pay interest on the full amount due, but I intend to make full payment by that time (and I will have sufficient information to know my liability well before then).

You are right about the interest, but you do not want to incur the under-payment penalty that results for not reaching the 90% mark. That penalty can be substantial.

Quote:

Originally Posted by Principle

I could scramble to send in 12K by Jan 15th, but the impression I get from Form 2210 is that if I were to send in enough to get me up to 90% of tax due (i.e 2K) by Jan 15th, I would not be charged interest for the period Jan15 - Apr15 2013 on the10K balance due (as long as I pay the rest by April 15th). So there is no benefit to sending in the full payment (or possibly overpaying) by Jan 15th, if I can get away with a smaller amount that would get me up 90%.

This is correct. In figuring the interest due Form 2210 has you figure out 90% of the estimated taxes that you should have paid in each quarter, and charges you interest up to the date when you actually paid it (i.e cauight up to at least 90% of the amount owed at that time). Example: suppose that the $100K tax bill is due to a steady stream of income, meaning you racked up $25K in taxes owed per quarter. If you paid estimated in the first quarter of at least 90% of that amount ($22.5K) then no interest is due for that quarter. But if you paid only $22K, then you are starting to build interest due on the underpayment of $500 - this interest builds from April 15 2012 through to the due date for the second quarter of June 15. Then suppose on June 15 you pay another $22K in estimated, again $500 short of the minimum. Now from the 2nd to third quarter due date of Sept 15 you are building interest owed on the combined underpayment of $1000. In the third quarter you pay another $22K, and so from Sep 15 to Jan 15 2013 you are building interest on $1500. Finally in January you pay $22K plus an additional $2K, bringing you to the magic 90% for the year, so no interest is due for the period Jan 15 - April 15. Bottom line is you would owe interest on $500 for 1 quarter, $1000 for 1 quarter, plus $1500 for one quarter. Hope this help.

Well done, ebaines! I was struggling on how to describe it to the OP, but you hit it right on the head!